UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEBRASKA

IN THE MATTER OF

THEODORE V. OLSON, SANDRA ANN OLSON,

Debtors,

·O 'NEILL PRODUCTION CREDIT

:

:

:

. . ASSOCIATION, :

Plaintiff,

v.

THEODORE V. OLSON, SANDRA ANN OLSON, OFFICI~L CREDITORS COMMITTEE,:

Defendants. :

Case No.

Adve.rsary Pro.No. 82-0244

ME~10RANDUM OF DECISION

This matter is before the court on a complaint to modify

the automatic stay of 11 U.S.C. § 362(a). The complaint was

brought by the O'Neill Production Credit Association ("Associa-

tion") against Theodore v. Olson and S~ndra Ann Olson ("Debtors" ),

debtors-in-possession in proceedings for reorganization under

Chapter 11 of the Bankruptcy Code.

An order was entered in this adversary proceeding on May 4,

1982, modifying the automatic stay so as to permit the Association

to foreclose its security interest in the Debtors• stored 1981

corn crop. 1

On August 20, 1982, this court issued an order further

modifying the stay of § 362(a) so as to permit the Association

1 Now on appeal to the District Court of this District .

•

to continue a real estate mortgage foreclosure action against

the Debtors.

Supplementing its Orders of May 4, and August 20, 1982,

the court makes the following Findings of Fact and Conclusions

of Law.

· 1. The Association holds three real estate mortgages on

·approximately 3, 819 acres of the Debtors' land: 2

a. November 6, 1978, ·$1,500,000 securing a note of $2,550,100, 3,025.16 acres (by real estate descriptions 3,019.11);

b. August 1, 1980, $600,000 securing a note of $600,000, 800 acres.

c. April 29, 1981, $800,000 securing a note of $800,000.

2. The mortgages of November 6, 1978, and August 1,

1980, each contain this provision:

This mortgage to be void upon payment in full with interest of any obligations, present or future, secured or to be se­cured hereby.

3~ In order to obtain the loans from the Association the

Debtors signed an "Application For Loan" containing a «Loan

Agreement" which recites in part:

That all loans, whether past, present or created in the future, or any renewals there-of owed by the undersigned to the Association, constitute one indebtedness of the undersigned, regardless of the number of promissory notes executed and delivered by the undersigned to the Association or the dates of making or the due dates thereof. All repayments on such indebted­ness shall be applied to the indebtedness as a whole, and shall not be applied to a~y specific

2 Some acres are covered by more than one mortgage.

..

1

J

note or notes. Also that all loans, whether past, present, or obtained in the future or any renewals thereof, owed by the undersigne4· to the Association, are secured by all pledged security whether past, present, or given in the future and whether in real or personal property, and shall stand as said security to the Association until. all such indebted­ness is paid in full.

4. The Association's claim against the Debtors is $4,621,886.

The net proceeds from the sale of the 1981 corn crop will be

approximately $1,000,000 reducing the claim to approximately

$3,621,886. All but one quarter section of the Debtors' real

estate is collateral for this debt.

5. Various portions of -the Debtors' property are

subject to other mortgage liens and encumbrances that are prime

to the Association.

a. John Hancock Ins. Co~ (2 mortgage) $1,584,907

b. Prudential Ins. Co.

c. Bernard Engler, 1st real estate contract 2nd real estate contract

d. George and Margret Keidel,· land contract

e. Ted Olson Enterprises, Inc., threshers lien

f. Ted Olson Enterprises, Inc., as assi gnee of a mortgage dated March 14, 1980, Republic National Bank of Dallas & First National

1,086,931

32,808 57,333

58,050

131,943

Bank of Minneapolis Approx. 450,000

g. First National Bank of O'Neill 150,825

h. Real estate taxes 23,077

i. Lien on grain bins 49,875 $3,625,749

' 1,1\\

6. Two reai estate appraisers have testified as to the

value of the Debtors• real estate. The Farmers National Company

places a value on all the real estate, irrigation facilities

and buildings as of March 1, 1982, at $4,020,400. Shonka

Real Estate, Inc. values the same property as of May 7, 1982, at

$4,392,472.

7. The value of the Debtors• property . rernaining after pay­

ment of all prime interest will range between $500,000 (the

Debtors• brief states $542,113.00) and $900,000 depending on

which appraiser is correct. It suits the court for purroses

of this decision to find the value of ·property available to

satisfy the Association's lien is somewhere between the two

outside figures.

The Association's claim is undersecured, which is to say,

the Debtors lack equity in the farmland and · other property

they need to conduct their farming operation.

8. The value of the farmland is relatively . stable. Like

most it has steadily appreciated since the Debtors ·started

farming. A recent slight depreciation in the past year reflects

the unfavorable farm economy. If there is some ·diminution of

value in the land in the near future it will be offset by the

improvement in the Association's interest that will result from

the application of the 1982 crop proceeds to senior liens . Such

payments should offset any interest accumulating on the Associa­

tion's secured debt, whatever that happens to be.

The Debtors are excellent farmers and have tended their

land with care. The soil for the 1982 crop year has been treated

and seeded to yield 150 bushels of corn an acre. Barring an

adverse act of nature it may produce 140 to 145 bushels this

crop · year. The existance of the crop improves and protects

the land. ·

Because the Debtors' farm land is irrigated, and the

center pivot irrigation system is functioning, it is reasonable

to assume the irrigation system is being maintained and is not

significantly depreciating.

An offer of a $50,000 lien on a quarter section not now.

covered .by the Association's lien gives the Association addi-

tional protection.

9. The Debtors' offer as other adequate protection against

a diminution in value of the Association's collateral the following:

1. Profit from the sale of the 1981 corn cro~.

2. Debtors' stock interest in the Association.

3. A check for $49,000 representing proceeds from the sale of personal property in which the Association has a security interest.

4. Certain mortgages assigned to Ted.Olson Enterprises, Inc., by the Republic National Bank of Dallas, Texas, and the First National Bank of Minnea­polis, which the Debtors claim are prime to the Association's mortgage dated April 29, 1981.

10. The financial troubles of the Debtors are traceable

to more than one source. The Debtors had substantial interests

in Olson Brothers Manufacturing Company and Southwest Farms,

Inc. Both of these businesses are now in straight bankruptcy.

Olson Brothers Manufacturing Company, a manufacturer of agri-

cultural irrigation equipment, drained significant sums of cash

from the farming operation at a time, when because of a de-

pressed farm economy, the farming operation could least afford it.

In terms of feed grains the depression is likely to·continue.

It is a real barrier for the Debtors.

11. The Debtors• most immediate need is cash to continue

·operations through a reasonably acceptable reorganization period. . . . .

If it had not been for Ted Olson Enterprises, Inc., the corn

crop for 1982 would not have been plated. That source of

funds is now exhausted.

12. On May 14, . 1982, the Debtors filed an application to

borrow money and secure the lenders with the 1982 corn crop.

The amount requested was $779-, 440 . On Hay 19, 19 82, the court . .

authorized an immediate borrowing of $199,449. On June 10,

1982, the·Debtors' application to borrow of May 14, 1982, was

granted. The Debtors cou"ld not find a lender who would follow

through \'lith · any cash.

The Debtors do project a favorable 1982 crop, but do not

have enough cash to manage it and start again next year. They ·

initially sought to use. the proceeds.from the 1981 crop as

operating capital.- This was denied to them by this court's

order of May 4, 1982. In that order the court stated that,

"(t]he~e has been enough evidence adduced to show that with a ·

timely infusion of enough working capital it is reasonable to

believe that there could be an effective reorganization."

This was the reason for ordering a final hearing on the complaint

to lift the stay filed by the Association. That final hearing was

held on June 10, ·1982, and is the subject of this ord~r. The

court also observed in its order of May 4, 1982, "[t]hey [Debtors]

have worked too long and invested too much not to give them a

few more days."

13. On June 14, 1982, an "Emergency" application for leave

to borrow was filed, and a make-shift arrangement was hurriedly

ordered to assure a supply of fuel and electricity for the

operation of the irrigation system.

It has been four months from the original order authorizing

the borrowing of operating capital and the Debtors. have still

not found a lender. The lack of cash is the second, and for a

farm operation of this size, an insurmountable barrier.

14. The philosophy of a reorganization under Chapter 11

is one of mutual consent; the joint efforts of the debtor and

creditors to salvage a business . The stubborn resistance of

the Debtors' largest creditor demonstrates that there will be

no consensual reo~ganization in this case. This is another

barrier that it is more than unlikely the Debtors can clear-

and expect to retain any interest whatsoever in their farm

property.

15. In the order of May ·4, 1982, . the court stated:

The Debtors project a corn crop of 516,000 bushels which at the 1982 corn program fixed price and the government storage rate for on­site storage would bring about $1,612,500, (Debtors' actual figure is at $1,613,636) . This figure with corn stalk rent fixed at $30,000, is about $1,642,500 .

This is the most the Debtors could expect to make on their 1982 crop. It is too specu­lative.

True, the cro~ is maturing and the proj~cted yield·may be

made . The Debtors' own assessmerit of cash requirements and

net profit , however, has been changed three times since early

1982. Projected profit ranges from a low of 98,050 to the

most recent projection (May 25, 1982) of a $416,685 prof-it.

Debtors attribute the increaie to a ten bushel an acre improve~

ment in expected yield; a heretofore unrealized right to a

$50,000 government grain program "deferred payment" , payable

in late October; a $137,000 storage payment for storing the

1982 crop; and the additional · income from one qua~ter section

of sorghum that should provide ·an additional "gross" of $40,000.

Because of recent rains 7 the Debtors have also used less fuel

for irrigation than expected~ The court ' is of the . opinion that

there is serious reason ·to doubt that the storage payment of

26-1/2 cents a bushel will be available to the Debtors.

What the court deems reasonabl e adjustments to the costs

of harvest, and the added expenses of marketing reduce the Debtors'

expected net profit substantially. It is more reasonable to

speculate there will not be enough cash after payment of all

expenses of the operation to pay the accruing taxes, principle,

and interest on the secured debt. Th~re wi l l be no cash and

no credit to commence next year's operation .

16. The Debtors have fi l ed a plan of arrangement. Pros~ctively,

it provides for a continued operation of the Debtors' farms.

There are no materia l changes in the manner that the farm business

will be conducted. The Debtors believe that this ongoing farm

production will result in profits through 1985, and the land will

appreciate in value •. Debtors' estimates of profit through 1985

are: ·

1983 1984 1985

$526,000 $578,000 $708,000

They predict the land will be worth $5,500,000 in 1985. There· ·

is no evidence in the record to support these projections.

CONCLUSIONS OF LAW

1. The Association has a substantial interest by way of

valid and subsisting real estate mortgages on the real estate

of the Debtors described in the mortgages. This interest is

entitled to "adequate protection" during the course of the

Chapter 11 case. 11 u.s.c. § 362 (d) (1).

2. The value of .the Association's undersecured interest

is the value of the real estate that remains after all prime

mortgages, contract interests and encumbrances are satisfied.

3. The Association's interest in the Debtors' real estate

is adequately protected at present.

4. The Debtors have no equity in the real estate on

w~ich the Association has mortgages.

5. The Debtors have failed to sustain their burden of

proof that the real estate subject to the Debtors' mortgages

is necessary for an effective reorganization of their farm

business. 11 U.S.C. § 362 (d) (2) (A) .

6. The stay of 11 u. s.c. § 362 should be modified to permit

the Association to prosecute the foreclosure of its mortgages.

UEMORANDUM OF LAW

.. The Bankruptcy Code at once provides Debtors with protection

from their creditors in the rehabilitation proce~s under Chapter .

11 by means of the automatic stay of § 362(a), and provides a

.means .to test the continued.need for the stay in§ 362(d). It

is § ··362 (d) that is the focal point of this memorandum. It

recites:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief fro·m the stay provided under subsection (a) of this. section, such as by terminating, annulling, modify­ing, or conditioning such stay--

(1) for cause, including the lack of ·adequate protection of an interest in property of such party in interest;-··-or-· ·

(2) ,.,i th respect to a stay of an act against property, if--

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effec­tive reorganization.

The responsibility for th~ burden of proof is set out in

§ · 362(g) and falls as follows:

(g) In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a} of this section--

(1} the party requesting such relief has the burden of proof on the issue of the debtor~s equity in property; and

{2) the party opposing such relief has the bur­den of proof on all other issues.

The Association urges there is cause to lift the automatic

stay, including a lack of adequate protection, and in the

alternative that the Debtors do not have equ~ty in the real

estate, and that the real estate is not necessary to an effective·

reorganization.

The Debtors deny the fact of the existance -of either

ground.

Since the remedies are phrased disjunctively, the Associa­

tion will prevail if it is entitled to relief under§ 362(d) (1)

or (2). In re La Jolla Mortg. Fund, 18 B.~. 283, _ 286 (Bankr.

S.D.Cal. 1982); In re Family Investments, Inc., 8 B.R. 572, 575

(Bankr. W.D.Ky. 1981); In re High Sky, Inc., 15 B.R. 332, 335

(Bankr. M.D.Pa. 1981); Cf., In re Saint Peter's School, 16 B.R.

404, 408 (Bankr. S.D . N.Y. 1982).

The Association's proof and arguments under § 362(d) (1)

center on adequate protection. It insists the real estate is

depreciating, and that the money it has invested is eroding

as time passes.

The cases decided ·under the . Bankruptcy Code ·are holding,

in the main, that adequate protection ·during the pendency of the

stay requires preservation of the creditor's secured interest

in the collateral at the time of filing the debtor's petition,

that is the value of the collateral minus the amount of any

_primary liens. See In re Monroe Park, 17 B.R. 934, 939 (Bankr.

D.Del. 1982); citing, In re BBT, 11 B.R. 224, 229 (Bankr .

D.Nev. 1981); In re American Mariner Industries, Inc., 10 B.R.

711, 713 (Bankr. C.D.Cal. 1981); In re Nixon Machinery Co.,

9 B.R. 316, 317 (Bankr. E.D.Tenn. 1981); In re Williams, 7 B.R.

234, 237 (Bankr. M.D.Ga. 1980); In reEl Patio, Ltd., 6 B.R.

518, 522 (Bankr. c ·.D.Cal. 1980); In re Rogers Development Corp.,

2 B. R. 679, 685 (Bankr. E.D.Va. 1980). See also, 2 Collier

on Bankruptcy, t· 362.01[1] (15th ed.).

Whether this value fixed for the secured claim should con­

tain an amount for the· loss of the use of the value of the

·collateral while · the stay ·is in effect~ and that_ this additional ·

value is to be adequately protected is subject to debate. See

In re Monroe Park, s upra at p. 940; In re Virgi nia Foundry Co.,

Inc., 9 B.R. 493, 498 (Bankr. W.D.Va. 1981); contra, I n re

American Industries, Inc., supra at p . 712. In any event, the

secured value plus the value of its use in terms of i nterest is

all the protection the Association has comipg.

I t is difficult to put a precise value on the secured

claim of the Association as it is not definately fixed by the

evidence. The court believes that it will turn out to be c l oser

to the higher figure of $900,000 s-tated in the findings of

fact.

The findings of fact explain to the court's satisfaction

that the Association is adequately protected to the extent the

law requires. It must be kept in mind that adequate protection

is a flexible concept which requires a court to make decisions

on a case by case basis, "after full consideration of the

pecul iar characteristics common to each proceeding." I n re

Monroe Park , Inc., supra at p . 940. See In re San Clemente Estates,

5 B.R. 605, 609 (Bankr. S . D.Cal. 1980).

The Debtors' argument that the mortgages of November 6,

1978, and August 1, 1980, are void and not subject to

adequate: protection· is·· tortured · and unconvincing .

The term "comfort" as used by Ted Olson to characterize

these mortgages is foreign to the court. His opinion

standing alone that this was a ·"comfort" mortgage adds little

to the court's.ignorance of such · a form of legal encumbrance.

The Association's witnesses, and counsel for the Association

at least, find the concept foreign to the business practice of

the Association. The idea that the phrase "void on any payment

in full with interest of any obligation, present, or future,

secured or to be secured hereby/' means that "any" paymen.t·

of "any" obligation secured by the mortgage releases all obli­

gations secured, and voids the entire mortgage is untenable,

particularly, when it contradicts all the other terms of. the

mortgage; for example, all the provisions of (4) relating to

payment of taxes and rental charges, and leases assigned as

security; and (5) default provisions in the event of fai l ure

to pay "said principal sum" or advances, or interest when due .

The "princ~pal sum" being in the sum "of Eight Hundred Thousand

and no/100 --Dol lars."

These two mortgages are titled "Nebraska Real Estate

Mortgages" and are obviously intended to be used under the

common and statutory law of Nebraska relating to real estate as

general real estate mortgages. A judicial construction based

solely on the use of the term "any " instead of "all" used in

the mortgage of April 29, 1981 , containing in every other respect

the identical "boiler plate" of the first two mortgages, in

an effort to produce some unfamiliar, illd~fined, .and contradict­

ory "comfort" mortgage would be an absurd construction.

The court should; it is true, construe unclear terms .of a

written contract against the writer, but at the same time,

it ·must guard a~ainst interpretations which lead t6 a document's

total invalidation.

The-court's findings are dispositive of the issue of

adequate protection and obviate the need to assess the res­

pectability of all the Debtors• offers of adequate protection,

other than to say adequate protection mus-t be compensatory

in nature and result in an increase in value. In re Virginia

Foundry, Inc., 9 B.R. 493, 497-98 (Bankr . W.D.Va. 1981) . The

offers of the P.C.A. stock, already_collateral, and a check

for proceeds from the sale of collateral are not compensatory.

Neither does the court have the slightest trouble with the

issue of "equity, .. the only burden of proof .on the Association.

§ 362(g) (1). 111 Equity' is the value,· above all secured claims

against the property, that can be realized from the sale of the

property for the benefit of the unsecured creditors." (citations

ommitted) In re La Jolla Mortgage Fund, supra at p. ' 283.

The Debtors have no equity in the farm property , Ted Olson

admits it.

This leaves the central issue of this pioceeding; is the

farm property necessary to an effective reorganization. This

means more than a simple claim that the Debtors• business needs

the farm property to survive. The Debtors must establish to the

court·' s · ·sati-s-faction·· that a reorganization ·is, in fact, a realis-

tic possibility. In· re Dublin ·Properties, 12 B.R. ·77 (Bankr.

E.D.Pa. 1981);· In reDiscount Wallpaper Center, 19 B.R. 221, 222

(Bankr. M.D.Fla. 1982); This is just another way to say a

reorganization is feasible. In re Martin, 19 B.R. 496 (Bankr.

E.D.Pa. 1982); In re Aries Enterprises, Ltd., 3 B.R. 472 (Bankr.

D.D . C. 1980); In re Castle Ran~h of Ramona~ Inc., 3 B.R~ 45

(Bankr. S.D.Cal. 1980); In re Hanson Dredging, Inc. 1 6 B.R.

-230 (Bankr. S.D.Fla. 1980); In re Gilec~ 7 B.R. 469 (Bankr.

E.D.Pa. 1980).

Collier's commentator, no doubt recalling problems of

reorganization under the former Bankruptcy Act states, "The

reference to an 'effective' reorganization should require relief

from the stay if there is no reasonable likelihood of reorganiza-

tion due to creditor dissent or feasibility corisiderationg."

2 Collier on Bankruptcy, 11 362.07[2], p. 362-48 (footnotes deleted-

emphasis in original) .

In this proceeding the principal unsecured creditor, the

Association, is an intractable and obdurate foe of any attempt

to reorganize this business.

Other conditions are negative in the extreme, such as the

absence of ca s h and no credit.

Two other conditions are beyond the control of the Debtors,

weather and the economy . These make the Debtors ' projections

nomore than a hopeful glimmer. All the Debtors can offer is that,

"indications are present that the farm will be able to operate

at-a profit in-years ·to oome. " (Debtors' bi:·ief, August ·3,

1982, p. 8}. The secured debt burden is inescapable. It amounts

to more than the farm property can support . ·

The Debtors have a f~rmer's seemingly ingrained disposition

to hope. Next year is always the year. The fact is that the

Debtors have been operating on the a9preciation of the land and

·c no·t .. on · raw<prof it; · · I-t =is: asking ·too _ much ··to ask -the .creditors·

to bear all the risk, or ·force them to place faith in no more than

the Debtors' optimistic expectations.

If the Debtors do not survive as farmers, it is not because

of their creditors. It is because of th~ir improvident use of

credit , · injudicious ambition, and an injurious farm economy .

Dat~d this 14th day of September 1982.